Is Cryptocurrency a Viable Solution for the Unbanked in Africa?

When bitcoin entered the public’s eye for the first time in 2013, it was touted as one of the greatest inventions for the unbanked in Africa. The World Bank estimates that of the 2 billion people without access to the modern financial system, a third live in Sub-Saharan Africa. In recent months, bitcoin and cryptocurrency as whole have received much attention. Further, the underlying blockchain technology has gained mainstream acceptance. While the potential of such technology seems to be limitless, the question remains whether cryptocurrency is a viable solution for the unbanked in Sub-Saharan Africa.

On its face, Bitcoin appeared to be the front runner and ideal candidate for cross-border transactions, especially remittance payments. However, the volatile nature of the cost associated with such transactions as well as the lack of a robust cryptocurrency ecosystem, has limited the effectiveness of Bitcoin on the African continent.

For many, the cost to send money into Africa through banks and wire services can be a challenge, with transaction fees usually in the range of at least 10 percent. Intra-African money transfer is even more expensive and the cost can rise to as high as 17 percent. Although Bitcoin was initially cheaper with the average transaction fee being only a few cents, in recent months, the transaction fee has proven to be extremely volatile. In December 2017, the average transaction fee climbed to as high as 50 USD, while in March 2018, it dropped to about 2 USD. Because the transaction fee within the bitcoin network does not depend on the amount of bitcoins being sent, for smaller transactions, the cost of transaction would be prohibitively high.

An additional problem lies in the cost of exchanging Bitcoin into local currency, and the lack of an ecosystem to support such exchanges. Because merchants do not universally accept Bitcoin as a means of payment, recipients of cryptocurrency must deal with the issue of converting into local currency. With low demand for bitcoin in sub-Saharan Africa, the ecosystem to support cryptocurrency is currently not robust enough to make the exchange market liquid.

New cryptocurrency platforms also face strong competition from existing fintech companies such as M-Pesa, the ubiquitous mobile money in Kenya. M-Pesa is supported by Safaricom, the biggest telecommunication company in the Kenya market with more than 70 percent of the market share. In 2015, Safaricom stopped its business with other Bitcoin payment processing companies, further limiting the ability of new cryptocurrency companies to break into the Kenyan market. Moreover, Kenya’s high court has held that Safaricom is not legally required to conduct business with such companies, giving the telecommunications company a semi-monopoly and adding further obstacles to the advancement of cryptocurrency technologies in Kenya.

The history of BitPesa, one of the oldest and best-funded blockchain companies in Africa, is illustrative of the difficulty in offering bitcoin remittance service in Africa, but also the potential the underlying technology has to solve banking issues on the continent. BitPesa initially aimed to provide a consumer level cross-border remittance service. However, when faced with the challenges highlighted above, BitPesa pivoted to provide a business-to-business (B2B) payment service instead. Currently, BitPesa is best used by entrepreneurs in Africa who utilize it as a foreign exchange and B2B cross-border payment system for large transactions. BitPesa has been gaining traction in recent time with over 6,000 customers across the continent, demonstrating that the future of cryptocurrency on the continent of Africa may be going in an upward trajectory.

As cryptocurrency and blockchain technology mature, and transaction costs are reduced, using cryptocurrency as a means of remittance may become a reality for many in Sub-Saharan Africa. Further, cryptocurrency and blockchain technology are gaining acceptance among African millennials who desire to not only use the technology but find ways to learn and innovate upon it. With the demand for cryptocurrency on the rise universally, and a growing base of millennials understanding the underpinnings of the technology, it is foreseeable that in the near future, cryptocurrency could very well be a solution for the unbanked in Sub-Saharan Africa.

For more information on the current state of blockchain technology including a synopsis of the use of cryptocurrency in various countries in Africa, please visit the Global Blockchain Business Council Annual Report located here.